Sticker shock in grocery store checkout lines and gas pumps around the western world is starting to set in. At this point, you have to be living under a rock to not notice that prices of goods and services around the world are increasing substantially.
Much of the blame for rising prices has rightfully been levied on the uncontrolled expansion of central bank balance sheets– the US Federal Reserve, for example, created more money in the last two years than it had created in the previous 200. Rejecting reject the possibility that any of this money could impact consumer prices is just intellectually dishonest.
There is another factor, however, that weighs heavily on inflation, and it is seldom discussed in this context: taxes.
Everybody hates paying taxes… but what few people realize is that tax hikes fuel rising prices. When payroll tax rates, import duties, corporate profits tax rates, sales tax rates, etc. increase, it’s always the end consumer at the cash register who gets stuck footing the bill.
This is happening across the world right now, including in the United States. While governments in places like Illinois have made headlines for infamously raising their income tax rates in the middle of the night, local government tax hikes are going largely unnoticed.
At present, 14 cities across California are raising their local sales tax rates, the highest being in Union City and El Cerrito (near San Francisco) to 10.25%. Then there’s Prattville, Alabama, a town of 30,000 near the capital Montgomery, which just raised its local sales tax rate 1% to 9.5%
This has the effect of making everything more expensive– instantly. Now, 1% might not seem like that big of a deal, right? This is how politicians think– do we really care if we pay $50 at the checkout line, or $50.50? Of course not, it doesn’t matter.
It’s not about a single purchase, though, it’s the aggregate of all of our purchases, and its starts to add up. Not to mention, there’s the slippery slope of thinking “well, if 1% didn’t matter last time, let’s hike tax rates another 1%.”
Over time, the same thing happens when income tax rates rise. When individuals have less disposable income to spend, everything certainly feels more expensive… and when corporate and payroll tax rates increase, those increased costs get passed on to consumers in the form of higher prices.
There are some places in the world, however, that are getting it right. Singapore is one such place.